Fed Hubris: Housing Prices Show The Fed Is Making The Same Inflation Mistake

The Fed is repeating mistakes it made in the dotcom and housing bubble decades. A series of housing-related charts will explain.

Case-Shiller Home Price Index Levels

Case Shiller Home Price Index as of  2021-12

Here We Go Again

The Case-Shiller Home Price indexes (a measure of repeat sales of the same house) show that home prices are more extended now than ever before.

Those price levels are from December 2020.

Not Understanding Inflation

On February 10, Jerome Powell gave a speech on Getting Back to a Strong Labor Market

In his speech, Powell said the Fed "will likely aim to achieve inflation moderately above 2 percent for some time in the service of keeping inflation expectations well anchored at our 2 percent longer-run goal." 

On February 24, Powell Dissed Inflation and Ignored Questions From Congress About Leverage

On March 4,  I commented Powell Confirmed Easy Money Until the Cows Come Home.

Meaning of Stable

But why 2%, not 1% or 0%? Certainly 2% is not "stable" by any reasonable definition. 

Regardless, to make up for past inflation allegedly being lower than 2% Powell repeated his pledge to let inflation run above 2%. 

Is inflation lower than 2%? As measured by the CPI, it is. But the CPI is a terrible measure of inflation.

It ignores all asset bubbles, it ignores housing prices, and it seriously underweights medical expenses.

Medical Expenses

The CPI seriously underweights medical expenses by averaging in Medicare and Medicaid. 

Healthcare services make up 17.75% of the PPI but only 6.97% of the CPI.

Ask anyone who buys their own medical insurance how fast rates are really rising.

For discussion please see Healthcare is the Biggest PPI Component With Over 3 Times Energy's Weight

With that, let's return our spotlight to housing. 

Housing Disconnects From Rent and the CPI

CS National, Top 10 Metro as of 2020-12

Prior to 2000, home prices, Owners' Equivalent Rent (OER), and the Case Shiller national home price index all moved in sync.

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